Official blog of Gurcharan Das. He is the author of India Grows at Night: A Liberal Case for a Strong State (Penguin 2012);The Difficulty of Being Good: On the Subtle Art of Dharma (2009),India Unbound (2000),a novel,A Fine Family (1990),a book of essays The Elephant Paradigm (2002) & an anthology of plays,Three plays (2003). He writes a regular column for the Times of India and 5 Indian language papers and occasional pieces for the Wall Street Journal, Financial Times, and Time magazine.

Sunday, November 10, 2013

Our bullion-dollar troubles can end if India goes for gold

It was a
subdued Diwali this year. Gold trading on Dhanteras was down by 50%. Traders
blamed it on mostly on the lack of gold supply which was 83% lower than last
year. But policy makers cheered. Their draconian policy of restricting gold
imports was working. India’s trade deficit had declined and the rupee had
calmed. But it is a temporary victory. Gold smuggling is on the rise and will
eventually triumph, undermining a great victory of the 1991 reforms, which was
to kill the havala market. There is breathing room, however, as gold
forecasters expect world prices to fall. Western and Chinese investors are
losing interest in gold as their economies pick up, which should also dampen
Indian investor interest.

India absorbs about
a quarter of the world’s gold, and the finance minister is quite right in
wanting to limit its import. A recurring theme of world history is the constant
loss of Western gold and silver to India. Two thousand years ago Roman senators
grumbled that their women used too many Indian spices, silks and fine cottons,
and India was draining the Roman empire of bullion. Pliny the Elder called
India the ‘sink of the world’s precious metal’ when he heard that a Roman ship
touched an Indian port daily.

The Portuguese
similarly complained in the 16th century that their hard won gold and silver
from South America was being lost to India. The British Parliament echoed this
refrain in the 17th century. But India kept sucking Western bullion because Western
consumers hankered after Indian luxuries and Indians were not interested in
Western goods. As books had to be balanced, they were balanced with bullion.
Only Britain’s Industrial Revolution reversed the flow in the 19th century when
Indians finally found something they wanted from the West—cheap, durable
cottons from the mills of Lancashire — as handlooms worldwide gave way to
machine-made cloth.

Soon after
Independence, India’s leaders forgot their grand trading heritage and closed
our economy in the mistaken belief that trade had impoverished India. Touting
the false mantra of ‘self-reliance’, they adopted an import-substituting path,
and India lost out in the great trading boom after World War II. India’s share
of world trade declined from 2.2% in 1947 to 0.5% in 1990. It was only after
1991 that India regained its historic pre-eminence in the world economy.

Given the one-way
flow of gold over the centuries, a staggering amount has accumulated in India.
The World Gold Council estimates it to be over 20,000 tonnes, worth $1.1
trillion or half of India’s GDP. For years economists have wanted to use this
unproductive asset for productive investment. And happily, the process has
begun. Gold loans, bonds, and deposit schemes are all steps in the right direction.
In these schemes owners of gold earn interest by depositing it with banks,
which in turn releases part of it in the market, thus reducing India’s demand
for imported gold.

The bigger prize is
to convince temples to do the right thing and deposit their vast gold stocks in
banks and earn interest. Jamal Mecklai, the currency expert, had suggested
earlier this year that if Tirupati temple were to deposit a third of its
holdings at two per cent interest, it could earn Rs 3,000 crore a year.
Tirupati did just that in May, beginning with a 2,250-kg deposit with the State
Bank of India. This is a triumph! If major temples follow suit, gold will soon
flood the domestic market, imports will stop, the global gold price will fall
and the rupee will strengthen.

But this government
is shy to go for an all out public campaign. It worries about people’s
sentiments and of the opposition playing the religious card. Gold is, after all
stridhana, ‘woman’s wealth’. Although a daughter now legally inherits her share
of family property, families still insist on giving her inheritance at marriage
as gold jewellery. But young Indians today are sensible and they will buy the
idea that an inflation-proof gold linked certificate exchangeable for gold is
the hip thing to receive at marriage rather than a bunch of clunky sets. So go
for it, Reserve Bank. The road to India’s economic future may well be paved
with gold.

About Me

Gurcharan Das has recently published a new book, India Grows at Night: A liberal case for a strong state (Penguin 2012). He is also general editor for a 15 volume series, The Story of Indian Business (Penguin) of which three volumes have already appeared.
He is the author of The Difficulty of Being Good: On the subtle art of dharma (Penguin 2009) which interrogates the epic, Mahabharata, in order to answer the question, ‘why be good?’ His international bestseller, India Unbound, is a narrative account of India from Independence to the global information age, and has been published in 17 languages and filmed by BBC. He writes regular column for several news papers and periodic guest columns for the Wall Street Journal, Financial Times, Foreign Affairs, and Newsweek. Gurcharan Das graduated with honors from Harvard University in Philosophy, Politics and Sanskrit. He later attended Harvard Business School. He was CEO of Procter & Gamble India and later Managing Director, Procter & Gamble Worldwide (Strategic Planning). In 1995, he took early retirement to become a full time writer.
Visit http://gurcharandas.org for his complete work and profile.